I just read an interview with Glenn Christenson, CFO of Station Casinos
(NYSE: STN). His company is the "big player" among casinos that target the
locals in Las Vegas. I live in Las Vegas and I am a casual player who
patronizes a couple of the properties.

The tough question that must be asked is this: What is the typical gaming
company doing to deliver value to the shareholders?

I ask this question because of my experience while owning the stock of a
different casino company. A couple of years ago, I bought shares of
Circus-Circus (now Mandalay Resorts) when they were building their Luxor
property, and while they were getting good earnings from the Excalibur and
Circus-Circus properties. My experience when their earnings dropped off was
very discouraging. I watched the stock price tumble, while the company
directors just sat there and wrung their hands and mumbled about how bad
things were. I even called the investor relations department (and had a short
conversation with their CFO) to suggest that the company consider
repurchasing shares from the open market. He was not receptive to the idea.
Nor was the company.

I believe that these companies use all their "earnings" to refurbish their
properties, and that they don't accurately record the depreciation for those
properties on their books. For several years, Circus-Circus had the
reputation of generating enough cash flow to expand without resorting to
borrowing to raise the needed money. But as they built their properties, the
amount of debt went up. Station Casinos is in much the same situation now as
Circus-Circus was in a few years ago. They have the "new" properties that
attract the players, but that will change in a few years as these places
start to show some signs of wear and tear, and as competitors build new
properties.

The gaming industry is intensely competitive, with lots of potential to
deliver earnings. It is said that a casino will deliver more earnings per
square foot of floor space than any other building (maybe beating out even
the virtual ones on the Web). But the potential to "skim" money from the till
is pretty great. We should ask these people what they do to keep the profits
from lining the pockets of the people in the company. I believe that most of
the safeguards can be defeated, and that a lot of potential earnings are
being lost. Further, there is not a lot more that the industry can do about
it.

I was burned once, during the time that I owned Circus-Circus stock. I
decided then that there is no real interest to deliver value to the
shareholders. Indeed, I think the real function of the shareholders is to
provide an aura of legitimacy to the business of gambling. It provides the
illusion that anyone can be a part-owner of a casino through ownership of
stock. But the only way that these companies (who in general pay no
dividends) can deliver value to the shareholders is through price
appreciation of their stock.

The casino industry, muck like the auto industry, expands and contracts with
the economy. Just a few years ago, there was concern on the Las Vegas strip
that there were too many hotel rooms out there for the number of visitors.
Now we are in a time of expansion for those casinos who cater to the locals,
but, since many competitors are piling on, this market will also be saturated
in time.